GDP growth estimate for 2012-13 down to 5%

The CSO released GDP growth estimates for 2012 – 13 today, and they estimate the growth for 2012 – 13 to be 5%.  This is lower than any their own earlier estimates and also from RBI’s 5.8% which was released a few days ago.

There were several articles today that discussed whether these estimates are pessimistic or not and whether the actual growth could be higher. No one can really say whether growth will be 5% or higher but at this point the chances of being 4 point something are much much higher than the possibility of being 6 point something. And if you spoke about 8% which is the 12th plan target then you will be laughed out of the room.

This is quite unfortunate, mostly self inflicted and quite in contrast to the euphoria that existed a few years ago.

Does anyone remember the time when Sensex hit two upper circuits on the same day?

Here is an excerpt from an ET article from May 2009.

Markets have stopped trading for the day as the benchmarks hit another upper circuit Monday as soon as the trade resumed after 2 hour break. Investors are euphoric after the United Progressive Alliance emerged victorious in the 2009 general elections.

Bombay Stock Exchange’s Sensex was locked at 14272.62 up 2099.21 points or 17.24 per cent. National Stock Exchange’s Nifty was locked at 4308.05, up 636.40 points or 17.33 per cent. According to media reports turnover including cash and F&O was less than Rs 1000 crore.

High inflation and low economic growth is a very sorry state of affairs for all retail investors. The high inflation of the past few years has meant that the real rate of returns on fixed products have been negative, and the low stock market return has meant that even the damned nominal return has been negative!

There are three things that immediately come to mind when thinking about this.

1. Savings are the only thing in your control: You can’t control government policies and you can’t control the nature of inflation or the returns of the stock market, but you can control how much you save, and in this kind of environment saving more becomes very important. That’s the only thing you can control, and you can still build a big education fund, or retirement fund or accumulate wealth for any other purpose if you have disciplined savings.

2. Avoiding financial mistakes is in your control: If you lose money by punting penny stocks, trading heavily, pay a lot of money in credit card interest then these are mistakes that are committed by millions of people before you and you should be learning from their mistakes, and not repeating them.

To quote Eleanor Roosevelt

Learn from the mistakes of others. You can’t live long enough to make them all yourself. 

3. Reality check: The quick run up in the market has made many forget how brutal downfalls can be but more importantly how some of the long standing problems facing the economy have not really been tackled. The Rupee is well over 50 to the USD, the deficit is very high, inflation is still quite high, and growth is low. While the market can certainly go up and down over a few years time, in order to have a long term upwards trend, the economy has to strengthen and the country has to resolve the economic issues it faces.

While this post may sound a tad too pessimistic, there are always things we can do to take control of our finances and be prepared for facing situations that await us.

SEBI wants to color code mutual fund products

A few days ago I came across an article about SEBI recommending color coding mutual funds so investors can associate risk with different shades of color and be warned that red denotes equity which means loss of principal possible and green means conservative debt so capital is relatively safe (just an example).

I’m not too enthusiastic about this idea because it seems to oversimplify things and if they do decide red as a color for equity mutual funds that will deter at least new comers who don’t really understand the market well from investigating equity further, and it can also imply to people that a fund with a green shade is safe to go into and will never incur losses which won’t always be true.

I am sure there are arguments to be made that this is useful and the best way to find out the reaction is to do a pilot and measure results. That will really tell us what effect color coding has on mutual funds, and then implement it full scale.

Explain the rationale behind fund name

I think there is another thing that’s more important and can add more value as far as making investors smarter is concerned, and it will be good if SEBI looks at that sometime as well.

This is having a small section somewhere in the mutual fund that describes why the mutual fund has been named in a certain way, and in some cases not allowing mutual funds to have names that have a certain connotation but the underlying investment don’t fit the connotation.

For example, I was going through the page for HDFC’s Children’s Gift Fund and to me this looks like a simple equity mutual fund, how is this a gift for your children?

If there were a section that explained the rationale behind this name in 140 characters or less that would be great, and I think a very useful service for investors.

IRDA can look at such guidelines as well – what does that Tata AIA Mahalife Gold have to do with gold? I can’t see anything that ties it back to gold as an investment.

These are a couple of examples that are perhaps a bit extreme but even with funds like SBI Dynamic Bond Fund it will be useful to know in a few characters what ‘Dynamic’ implies? In this case I believe it means that the fund is not tied to investing in bonds with a maturity of a certain kind, and if that’s the case then that is useful information for the investors.

Some food for thought, what do you think?

US sues S&P over ratings of subprime mortgages

It has been quite some time since I last read any news related to the subprime crisis so it came as a bit of surprise to me when I saw that the US government is suing S&P for their rating of subprime mortgages. 

Apparently, the US government has internal S&P emails that show at least some S&P employees didn’t think the mortgages they were rating deserved AAA and cautioned about the out of control market. But as pointed out in the article, not everyone thought that way in S&P and it’s hard to see how the government can win the case because almost everyone got it so wrong at the time, but they may be successful in getting a big settlement like they did with Goldman Sachs who paid $550 million over their subprime related lawsuit.

In an Indian context, there are plenty of debt issues these days, and most of the time these are government owned or controlled companies whose debt is rated AAA.

This is taken as a guarantee by almost everyone and I would be really surprised if anything were to go wrong with one of these companies. However, if you asked someone before the subprime crisis if they thought the market would implode so badly, there was no way they would’ve predicted it. We simply don’t know what we don’t know.

And if experts get it so wrong then what hope do retail investors have in looking through the books of a company and predicting a collapse? Close to zero I would imagine.

I think it is important to remember this at all times, and as far as debt is concerned, another important thing to keep in mind is that there is just no upside of not diversifying your debt holdings.

If all your money is concentrated in a stock then you can lose all of it but you can also make a lot of it if the stock turns out to be a ten-bagger, but in the case of debt, if you’re heavily invested in just a few instruments and they turn out to be wrong bets, you can lose a lot of money without having any upside at all.

The best defense against this is to own many different kind of assets including many different kind of debt assets and be diversified.

The other big learning from this is never send an email that you wouldn’t want to be published in front of the whole world.

Synching monetary policy with fiscal policy

Ams posted a comment on the article about the difference between monetary and fiscal policy, and asked how are these kept in synch since one is formed by the government and the other by the central bank.

This is an interesting question, and within the same country being in synch is not such a big problem but it has been a problem for the Eurozone, where 17 countries share a common currency and their monetary policy is controlled by ECB while their fiscal policies are controlled by each member country.

Ashok brought up this great point in the previous post. Here is his comment.

Ashok February 2, 2013 at 7:26 am

Simple and good article. Very easy to understand.

Is it the case in EU countries that the monetary policy is administered centrally by the ECB and the fiscal policy is administered individually by each country and that is why the views may not converge and leads to a crisis in EU? For e.g. Greece may want the interest rates to go down, but the central bank may not want it because it may lead to inflation in other countries (just an example….).

REPLY

Interest rates and money supply are controlled by the ECB (European Central Bank) and they target inflation at 2% which is how the monetary policy is transmitted across all Eurozone countries.

But the fiscal policy is a bit harder to control because each country has its own budget and are free to tax and spend as they like. The Eurozone countries have an overall deficit target of bringing down their fiscal deficit to 3% of GDP, but because each country’s current fiscal situation varies so widely it is hard for all of them to bring down their deficit to 3% immediately, and so they have intermediate targets, but largely, they get missed too.

For example, in March last year Spain said that it wouldn’t be able to meet its target of a deficit of 4.4% of GDP and would be at somewhere around 5.8%. Spain had overshot its target in 2011 also, and I’m unable to find the final number for 2012.

The Eurozone countries all have quite varied fiscal positions, and this link shows the latest numbers for all countries that are part of the EU. You can see that this ranges from Sweden’s 0.2% surplus to Ireland’s 31.3% deficit!

Last year the EU countries also came up with a ‘golden rule’ which had certain conditions that each EU country that agrees to it will abide by like retaining the deficit under 0.5% if your debt is more than 60% of GDP, and under 1% if the your debt is less than 60% of your GDP.

There are a lot of other rules as well, and framing these rules and having these intergovernmental treaties is a way to synch up fiscal policies with monetary policy.

The last few years have shown that this has not been really successful and there is little reason to believe that things will change in the future. They do however are a good example of what needs to be done, and in a perfect world how it could be done.

Free PDF download – beginners guide to investing in the stock market

In going through the Suggest a Topic comments I came across Chintak Dholakia‘s comment and it reminded me of a similar comment when the market began rising a few months ago.

Here is his comment:

Chintak Dholakia January 14, 2013 at 6:19 pm [edit]

Hey,

I have one request. Can you please guide as in how to start buying shares? What is the process? I am completely new to this field and i did’nt find any information about it. How to invest,what is the process, what are per-requisites i would require to buy shares. Take some example and explain, as in i have balance of say Rs.50000 to invest in shares, how should i go? how much should i invest in safe deposits, how much in share?

Kindly guide.

Thanks
Chintak Dholakia
Newbie,unguided Share market enthusiast!

REPLY

I’m sure a lot of people feel this way every time the market goes up, and I had written a series of blogposts about this earlier titled how should beginners approach investing in the stock market that addressed part of the question about stock market investing and buying shares. I was initially going to point Chintan to that series but then I thought it is a better idea to create a small eBook out of those posts, and keep adding content to it along the way.

I feel that this is a better way to deal with topics that are always of interest and gives a lot of opportunity to expand on the topic at a later date. I’m pasting the table of contents here for you to see if this will be of value to you, and if you do find use for it then I hope you forward it to friends and family who might be interested in it as well.

  • Three Stages of an Investor
  • The Implicit Assumption
  • What is the nature of a share?
  • How to execute based on this knowledge?
  • Instruments that help execute this
  • Parting words

As always, any feedback you may have is greatly appreciated, and you can download the book here:

How should beginners approach investing in the stock market?

Immortal jellyfish looks through Hubble and finds structural problems with Indian economy

Let’s start with something amazing that I learned this week – there is a type of jellyfish that seems to be immortal! It grows old and then after a certain time, starts getting younger!

The RBI has this page on Government securities market in India, and I tweeted this out earlier thinking no one would pay attention, but three people favorited that tweet which is three more than what most of my tweets get, and I thought that this will be useful to a larger audience as well.

I don’t know for how long this has been true but MProfit which is a software we have talked about here earlier is now available for free download. 

Livemint has a good article on the structural problems that the Indian economy faces and how monetary policy plays a limited role in dealing with these challenges.

Mashable has an amazing post on pictures taken by the Hubble telescope.

Finally, do you know why giant squids have eyes the size of footballs?  or how the owl turns its head the way it turns its head?

Enjoy your weekend!

What is the difference between monetary policy and fiscal policy?

Couple of days ago I wrote a post answering some questions about monetary policy, and in this post I’m going to write about the difference between fiscal policy and monetary policy as these are two terms which are used together quite often.

Both of these are used to influence the economy of a country, but while the monetary policy is decided by the central bank or RBI in India’s case, the fiscal policy is decided by the government.

Monetary Policy

Monetary policy is carried out by RBI and manifests itself by setting interest rates like the Repo and Reverse Repo as well as determining levels of CRR and SLR which influence money supply and credit flow in the economy.

The main aim of RBI’s monetary policy is to keep a check on inflation and maintain an optimum level of GDP growth at the same time. If they raise the interest rates too high then that might help in checking inflation but at the same time deter economic activity and slow down GDP growth, and if they keep the rates too low then that will promote economic activity but it will also spur inflation.

They have to keep a balance between both so one is not sacrificed for the sake of the other.

The RBI is independent from the government and you can see this in the fact that RBI has been very slow to lower rates even when a lot of government officials have publicly said that rates should come down in the past couple of years or so.

Difference between Fiscal Policy and Monetary Policy

Fiscal Policy

Fiscal policy is the policy that determines how the government spends money, and taxes people to pay for those expenses. Taxes are the main form of earnings for the government although there are other forms as well like 3G auctions or PSU disinvestments. When the government is not able to come up with enough earnings to pay for their expenses they incur a fiscal deficit (Read: What is the meaning of fiscal deficit?), and this deficit is financed by borrowings.

The purpose of the fiscal policy is to promote economic growth as well, and during times of recession when government increases its spending or cuts taxes – that’s termed as a fiscal stimulus package because you are using the instruments of fiscal policy to boost the economy. India has had three fiscal stimulus packages following the last recession which involved tax cuts and boosts in spending, and were similar to stimulus measures used by countries around the world.

Conclusion

The goals of the monetary policy and fiscal policy are the same which is to promote stable and growing economic conditions in an economy, but the instruments used to carry these out and the bodies that carry these out are different.

They should be in synch to work well and such that actions of one don’t scuttle the actions of another and they succeed in their goals of maintaining a reasonable level of inflation and steady economic growth.